Gary Sasse: Can a State Infrastructure Bank Help Rebuild RI?

Wednesday, March 26, 2014

Gary Sasse, GoLocalProv MINDSETTER

 

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Innovative financing of public infrastructure may be the wave of the future, but the devil is in the details, believes Gary Sasse.

The Ocean State suffers from a deficiency of available capital to improve its infrastructure. World class public infrastructure is essential to sustain the development and growth of businesses at scale. After years of neglect Rhode Island’s roads, bridges, public buildings and schools are in dire need of repair and up-dating. Concurrently, the State’s per capita tax-supported debt is the tenth highest in the nation.

The good news is that today infrastructure modernization is at the front and center of Rhode Island’s political dialogue. Gubernatorial candidates and other office seekers are making serious proposals to improve state and local infrastructure. A bi-partisan group of state legislators has called for the creation of a transportation infrastructure fund. RI-CAN, an educational advocacy organization, has proposed options to deal with school infrastructure. The RebuildRI Foundation for Policy Research has been partnering with the Hassenfeld Institute at Bryant University and others to organize a best practice symposium on infrastructure financing.

State Infrastructure Banks

Central to the conversation of infrastructure has been the suggestion to create some type of infrastructure bank or fund. By way of explanation, a state infrastructure bank (SIB) is usually a revolving loan fund used for the financing and construction of public infrastructure. Operating similar to other types of financial institutions, SIBs use their initial capitalization and ongoing revenue to offer loans and credit enhancements in a number of different ways to public sponsors of transportation, wastewater, and energy projects.

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Bottom line, traditional SIBs serve as conduits through which public dollars are channeled to enhance the financing of capital projects. Evidence suggests that the success and effectiveness of SIBs has been mixed.

The Brooking-Rockefeller Project on State and Metropolitan Innovation found that since the 1990’s SIB type agencies have provided billions in financing for more than 1000 projects. “However, this activity is highly concentrated in just a few states as many SIBs are underutilized or inactive.” As Rhode Island debates the creation of an infrastructure bank it will be important to understand why so many have underperformed.

Innovative infrastructure programs

More recently new and innovative ways to leverage private investment in transformative infrastructure projects have been developed. For these innovative approaches to achieve their objective the Brookings Institution says they must be designed to ensure: 1) long-term sustainability of revolving infrastructure funds, 2) partnerships with private and public interests and 3) alignment with federal and state project responsibilities. Hopefully the candidates will keep these lessons in mind when discussing innovative infrastructure financing.

Chicago Mayor Rahm Emanuel has championed the creation of the Chicago Investment Trust. This trust vehicle is different from a conventional SIB. An investment trust is a more sophisticated tool for fostering private-public partnerships to finance needed infrastructure.

Funds from an infrastructure trust typically would be invested in projects where there is a high probably of attracting private capital capable of leveraging taxpayer contributions. If successful an investment trust would allow a city or state to tap private resources to offset increasing taxes and public debt. This is something that is sorely needed in Rhode Island.

Former President Bill Clinton believes that investment trusts are an innovative way to attract capital for infrastructure programs without imposing additional burdens on state and local governments. The Clinton Global Initiative has joined with the U.S. Conference of Mayors to explore ways to utilize innovative financing to entice private capital to invest in public infrastructure.

While the Chicago Investment Trust has been acclaimed as a financing tool that could transform the way state and local governments build new infrastructure, it is not without its critics. An article that appeared in Governing found that “Despite the early promise, the Chicago Investment trust still hasn’t finalized financing on even one project.” Chicago’s Better Government Association said that the Trust lacked an overarching goal and looked to be a “scattershot”.

It would be premature to reach any conclusions about the Chicago Investment Trust. Establishing bold and innovative solutions to problems is always subject to unanticipated challenges. I believe that if properly designed, investment trusts have the potential to revolutionize the way state and local governments build new projects.

Must-answer questions

Nevertheless, there may be morale in this story for the 2014 Rhode Island gubernatorial campaign. Campaign promises to establish SIBs should be taken with a “grain of salt” if the candidates do not provide credible and specific answers to the following question.

1) How will the SIB or innovative financing scheme be capitalized? Will it require a tax or fee increase?

2) What types of projects and programs will be financed by the SIB?

3) Who will make the investment decisions and be responsible for the care and control of the SIB? Will it be a state agency, a quasi-independent organization or a public-private partnership?

4) How will the SIB interface with other state and federal programs?

Innovative financing of public infrastructure may be the wave of the future, but the devil is in the details.

 

Gary Sasse is Founding Director of the Hassenfeld Institute for Public Leadership at Bryant University. He is the former Executive Director Rhode Island Public Expenditure and Director of the Departments of Administration and Revenue.

 

Related Slideshow: 7 Strategies for Rhode Island Economic Development in 2014

What will it take to move the Rhode Island economy forward in 2014?  GoLocal talked with elected officials, candidates, and leaders for their economic development plans in the coming year. 

Below are key elements of the economic priorities for Governor Lincoln Chafee, Speaker of the House Gordon Fox, Senate President M. Teresa Paiva-Weed, House Minority Leader Brian Newberry, gubernatorial hopefuls General Treasurer Gina Raimondo and Ken Block, and RI Center for Freedom and Prosperity's Mike Stenhouse.  

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Governor Lincoln Chafee

"My goal is to have the state continue to focus on the fundamentals.  We will invest in education, workforce development and infrastructure , and provide aid to  cities and towns to lessen the burden on property taxpayers.  I’m confident that these investments and our focus on the basics will allow Rhode Island to exceed Moody’s predictions.”
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Speaker Gordon Fox

"Among the many pieces of legislation the House will address will be issues of higher education affordability, expanding apprenticeship opportunities, and offering help to our manufacturers.  We will also look closely at our tax structure to make sure we are competitive with our neighboring states, including the corporate tax and the estate tax, and I will carefully review the recommendations of the commission studying our sales tax.”

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Senate Pres. Paiva-Weed

Greg Pare, spokesperson for the Senate President, said that the Senate is planning to issue recommendations soon on workforce development initiatives to address the skills gap among Rhode Island job seekers.

"An example of a proposal anticipated in that report is the elimination of state’s Indirect Cost Recovery on the Job Development Fund, which is about $1.2 million this year. Those funds would be directed towards job training and skills development programs to provide immediate impact and help workers gain the skills necessary to succeed in today’s economy."

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Gen. Treasurer Raimondo

"To grow our economy, we need to make Rhode Island a leader in manufacturing again.  Great things can happen at the intersection of government, higher education, and the private sector.  Rhode Island is lucky to have thriving institutions in each of these three sectors, and we need to foster collaboration among them to find solutions to our challenges, and spark our economy.  

By promoting partnerships in high-growth areas, [Rhode Island Innovation Institute] will help grow our manufacturing base, and create new, high-quality jobs."  

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Ken Block

"First, we need to fix Rhode Island’s broken Unemployment Insurance program. The state’s Unemployment Insurance tax, paid by employers, is ranked worst in the country by the Tax Foundation. It is one of the factors that makes Rhode Island an uncompetitive place to do business. Also, it is inherently unfair that a large group of businesses are effectively subsidizing the payrolls of a small group of businesses who misuse the system. There is a simple change to state law that can fix this problem."

"Rhode Island’s temporary disability tax (TDI) is broken, and places an unnecessarily high tax burden on Rhode Islanders. This tax, paid for by employees, will be reduced by changing the way we manage the program. As Governor, I will substantially reduce the cost of purchasing this insurance by requiring that Rhode Island’s program adhere to national norms."

"To best encourage new job creation, I propose the following tax incentive: exempt from future capital gains taxes any new investments in Rhode Island-based businesses. This change would create a powerful incentive for investors who are deciding where to locate a new business, or where they relocate an existing one. This proposal has the potential change the economic playing field for Rhode Island."

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Minority Leader Newberry

“It would be overly ambitious to set being #1 as a goal right now, but we think 25, the middle of the pack, is a reasonable goal to set, one we think we should pursue, and one we can achieve,” said Newberry. "One of the initiatives is a requirement that every bill receive a fiscal evaluation before it can be heard by committee, better insuring that legislators know the real cost of the legislation they are acting on."

"Another proposal would exempt social security income from RI state income tax, making Rhode Island more tax-friendly for our seniors and keeping them here rather than migrating to more tax-friendly states."

“Strong action is way overdue here. Nearly 60% of Rhode Islanders now believe that the state is headed in the wrong direction. We think they’re right, and our central goal is to get it turned around."

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Mike Stenhouse

"As part of the Center's 2014 Prosperity Agenda we recommended that the state:
 
Repeal or rollback of the state’s regressive sales tax; or the requirement that families have no choice on what schools best educate their children; or punitive estate taxes that drive wealthy people to other states; or restrictions on out-of-state companies to sell health insurance in RI; or the minimum franchise tax, which stifles entrepreneurship; or corporate welfare, to level the playing field; or even renewable energy mandates that drive up costs for every family and business …"
 

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